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technic a l REP O RT
Financing the Operation and
Maintenance Costs of Hurricane
Protection Infrastructure
Options for the State of Louisiana
Trey Miller
Environment, Energy, and Economic Development Program
This project was sponsored by Louisiana’s Coastal Protection and Restoration Authority
and was conducted under the joint auspices of RAND Environment, Energy, and Economic
Development and the RAND Gulf States Policy Institute.
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b
Preface
About This Document
Over the next decade, the U.S. Army Corps of Engineers, in partnership with the State of
Louisiana, will invest more than $14 billion to help restore the Louisiana coast and improve
hurricane and flood protection. The State of Louisiana and local governments are responsible
for most or all operation and maintenance costs for these types of federal investments. In
Louisiana, levee districts have traditionally been the primary local government entity
responsible for providing these services. Because of the extent of the planned improvements
over the next decade, these costs will rise and the State of Louisiana and the levee districts
will face additional financial demands to cover higher operating budgets.
The purpose of this study is to provide Louisiana’s Coastal Protection and Restoration
Authority (CPRA) and eight of Louisiana’s 20 levee districts in the coastal zone with
alternative estimates of additional operating costs and options for potential future sources of
revenue.
The study was conducted under the joint auspices of the RAND Gulf States Policy
Institute and RAND Environment, Energy, and Economic Development (EEED).
This report was funded by CPRA.
The RAND Gulf States Policy Institute
RAND created the Gulf States Policy Institute in 2005 to support hurricane recovery and
long-term economic development in Louisiana, Mississippi, and Alabama. Today, RAND
Gulf States provides objective analysis to federal, state, and local leaders in support of
policymaking and the well-being of individuals throughout the Gulf Coast region. With
offices in New Orleans, Louisiana, and Jackson, Mississippi, RAND Gulf States is dedicated
to answering the region’s toughest questions related to a wide range of issues that include
coastal protection and restoration, health care, and workforce development. More
information about RAND Gulf States can be found at http://www.rand.org/gulf-states/ or by
contacting the director (rgspi@rand.org).
The RAND Environment, Energy, and Economic Development Program
EEED is part of RAND Justice, Infrastructure, and Environment, a division within
RAND dedicated to improving policy and decisionmaking in a wide range of policy domains,
including civil and criminal justice; infrastructure protection and homeland security;
transportation and energy policy; and environmental and natural resources policy.
iii
Questions or comments about this report should be sent to the project leader, Trey Miller
(Trey_Miller@rand.org). For more information on EEED, see http://www.rand.org/energy or
contact the director (eeed@rand.org)
iv
Contents
Preface............................................................................................................................................ iii Contents .......................................................................................................................................... v Figures........................................................................................................................................... vii Tables ............................................................................................................................................. ix Executive Summary ....................................................................................................................... xi Acknowledgments......................................................................................................................... xv Abbreviations .............................................................................................................................. xvii 1. Introduction ................................................................................................................................. 1 2. Projecting Operation and Maintenance Costs of Hurricane Protection Infrastructure ............... 3 3. Projections of Budget Balances, by Levee District .................................................................. 13 4. Approaches That Other States Have Tried for Financing O&M Costs of Levee and
Hurricane Protection Infrastructure ........................................................................................ 23 5. Findings .................................................................................................................................... 29 Appendix ....................................................................................................................................... 33 References ..................................................................................................................................... 39 v
Figures
Figure 2.1 Estimates for Annual O&M Costs for Pre-Katrina and HSDRRS Infrastructure, by
Levee District, High-Cost Scenario .................................................................................. 9 Figure 2.2 Estimates for Annual O&M Costs for Pre-Katrina and HSDRRS Infrastructure, by
Levee District, Low-Cost Scenario ................................................................................. 10 Figure 3.1 Operation and Maintenance Expenditures (1996–2004): East Jefferson, Lake
Borgne, Pontchartrain, Terrebonne, and West Jefferson Levee Districts ....................... 14 Figure 3.2 Operation and Maintenance Expenditures (1996–2004): Grand Isle and South
Lafourche Levee Districts ............................................................................................... 14 Figure 3.3 Operation and Maintenance Expenditures (1996–2004): Orleans Levee District. 15 Figure 3.4 Ad Valorem Revenue (1996–2009): East Jefferson, Lake Borgne, Pontchartrain,
Terrebonne, and West Jefferson Levee Districts ............................................................ 16 Figure 3.5 Ad Valorem Revenue (1996–2009): Grand Isle and South Lafourche Levee
Districts ........................................................................................................................... 16 Figure 3.6 Ad Valorem Revenue (1996–2009): Orleans Levee District ................................ 17 Figure 3.7 Projected Budget Balances, by Levee District, Under Four Scenarios ................. 19 vii
Tables
Table 2.1 Estimates of the Incremental O&M Costs for Hurricane Protection Infrastructure . 8 Table A.1 Pre-Katrina Hurricane Protection Infrastructure, by Levee District ...................... 33 Table A.2 Estimates of Annual Incremental O&M Costs for HSDRRS Infrastructure, by
Levee District .................................................................................................................. 34 Table A.3 Major HSDRRS Infrastructure with Multiple Potential Operators........................ 36 Table A.4 Projected Budget Balances, by Levee District ....................................................... 37 ix
Executive Summary
This report analyzes the fiscal capacity of local levee districts in southern Louisiana to
shoulder the burden of operating and maintaining the Hurricane and Storm Damage Risk
Reduction System (HSDRRS) and other key hurricane protection infrastructure currently
under construction by the U.S. Army Corps of Engineers (USACE). It specifically focuses on
operation and maintenance (O&M) costs, assuming that costs associated with major repairs
and levee lifts will not be borne by levee districts. It also discusses some approaches that
other government agencies responsible for operating and maintaining flood and hurricane
protection infrastructure are using to generate revenue to cover those costs.
The report discusses the methodology used to project the O&M costs associated with
hurricane protection infrastructure. It provides O&M cost estimates for each newly
constructed piece of the HSDRRS and estimates the total O&M costs to be borne by eight
major levee districts within the HSDRRS. Some of these estimates differ from estimates
based on cost-plus engineering estimates because they are based on historical expenditures
by levee districts to maintain existing infrastructure. The report then discusses our
methodology for projecting levee district budget revenues and budget balances through 2016.
The report concludes with a discussion of some options that other states have used to
generate revenue for the O&M of levees and hurricane protection infrastructure.
Projections of O&M Costs of Hurricane Protection Infrastructure
We combined two approaches to project the incremental O&M costs of the HSDRRS.
The vast majority of incremental O&M costs stems from large, newly constructed projects
with no precedent in the pre–Hurricane Katrina system.1 These include the Gulf Intracoastal
Waterway West Closure Complex (WCC) and the Seabrook Control Structure. For these
projects, we used cost-plus engineering-based O&M cost estimates developed by the
USACE. These estimates derive O&M costs by defining a 50-year O&M schedule; assigning
specific monetary costs for each O&M function based on assumptions concerning labor,
materials, and overhead costs; and taking the average annual cost over the 50-year project
life cycle. To estimate the O&M costs that will be borne by each levee district, we assigned
1
Hurricane Katrina made its second landfall along the Louisiana coast on August 29,
2005.
xi
each piece of this new infrastructure to a specific levee district and summed the projected
O&M costs of all pieces of infrastructure that will ultimately be assigned to that district.
The remaining incremental O&M costs associated with the HSDRRS stem from additions
of or major modifications to hurricane protection infrastructure similar to what was in place
prior to Hurricane Katrina. Examples of such typical projects include raising existing levees
or constructing new gates and pump stations similar to those that existed prior to Hurricane
Katrina.2 To estimate these incremental costs, we employed historical data on O&M
expenditures and pre-Katrina hurricane protection infrastructure by levee district to estimate
the incremental cost of operating and maintaining typical pieces of hurricane protection
infrastructure: levees, floodgates, and pump stations. To estimate maintenance costs for these
types of infrastructure, we measured levees in terms of area (acres) and counted the numbers
of floodgates and pump stations. We then used an econometric model employing historical
cost data to estimate the incremental cost of operating and maintaining an additional acre of
levee right-of-way, floodgate, and pump station, respectively. To estimate the additional
costs of maintaining and operating the new infrastructure being built within the state of
Louisiana, we applied these estimates to data on the numbers of new acres of levee,
floodgates, and pump stations being built within the HSDRRS.
To estimate the total O&M costs associated with the HSDRRS, we added the incremental
O&M costs obtained from the methods described above to baseline O&M estimates derived
by projecting forward actual annual historical O&M expenditures on the pre-Katrina system.
Approximately 72 percent of total O&M costs associated with the HSDRRS stems from
infrastructure that was in place prior to Hurricane Katrina.
Assignment of O&M responsibilities for HSDRRS infrastructure spanning levee district
boundaries or offering protection to multiple jurisdictions is a matter of ongoing discussion
in southern Louisiana. In many cases, it is still unclear how the O&M responsibilities for
such infrastructure will be shared by jurisdictions. The O&M estimates by levee district
presented in this report include only those costs associated with infrastructure that is wholly
contained within a levee district’s boundaries. As such, they represent a lower bound for a
levee district’s total expected O&M costs. We identified three major pieces of infrastructure
in the West Bank that either span the boundaries of West Jefferson Levee District (WJLD) or
provide significant protection to portions of Southeast Louisiana Flood Protection Authority
(SLFPA) West: the WCC and the Eastern and Western Tie-Ins. The total cost to operate and
2
While the number of HSDRRS projects with modifications to or construction of typical
projects far exceeds the number of unprecedented projects, the O&M costs associated with
each typical project is quite low relative to that of unprecedented projects. Thus, the vast
majority of incremental O&M costs stem from unprecedented projects.
xii
maintain this infrastructure is estimated at $3 million to $4 million annually. A key goal for
CPRA and other stakeholders will be to determine the allocation of O&M responsibilities for
these major pieces of infrastructure.
According to our projections, some districts will bear a larger share of the incremental
O&M burden associated with the HSDRRS than others. We project that the O&M costs for
Orleans Levee District will increase by $1.9 million to $2.8 million annually once the
USACE has transferred responsibility for the new infrastructure associated with the
HSDRRS. In contrast, we project that East Jefferson Levee District’s O&M costs will
increase by just $20,000 annually.
Projected Budget Balances, by Levee District
We use our cost estimates to derive projections of budget balances in 2016 by levee
district. Our projections assume the following:
1. The HSDRRS will be complete by 2016, and levee districts will be fully responsible
for the O&M costs of the system.
2. O&M costs per acre of levee, per floodgate, and per pump will not rise more rapidly
than the rate of inflation, i.e., they will be constant in inflation-adjusted terms.
3. Ad valorem (property) tax revenues will stagnate in inflation-adjusted terms between
2009 and 2016. We also investigate a scenario in which these revenues increase in
inflation-adjusted terms by 2 percent annually between 2009 and 2016.
We find considerable variance in projected budget balances across levee districts, with many
levee districts enjoying surpluses. Although Lake Borgne is projected to have a $2 million
deficit by 2016, Orleans and East Jefferson Levee Districts are projected to have $8 million
and $4 million surpluses, respectively, under the scenario that ad valorem revenues remain
flat in constant prices. Assuming that none of the O&M functions for the district boundary–
spanning pieces of infrastructure in the West Bank will fall on WJLD, the district will
roughly break even in 2016. However, if significant portions of O&M responsibilities for the
WCC and/or the Eastern and Western Tie-Ins fall on WJLD, then WJLD and SLFPA West
could both face budget shortfalls unless additional revenues are raised. Overall, under all
scenarios, the total of all projected surpluses exceeds that of projected deficits, even when the
district boundary–spanning pieces of infrastructure are included in SLFPA West’s budget,
suggesting that there may be scope for revenue-sharing across levee districts.
xiii
Approaches That Other States Have Tried for Financing Levee and
Hurricane Protection Infrastructure
Other states’ approaches for financing the O&M costs of levee and hurricane protection
infrastructure fall into three categories. First, we discuss options related to states’ use of land
in the levee right-of-way. Approaches used in other states, not necessarily appropriate in a
Louisiana setting, include
1. strategic leasing of prime levee right-of-way to casino and other commercial
developers
2. leasing of levee right-of-way for hunting or grazing purposes
3. selling off levee right-of-way and retaining conservation easements
4. leasing levee right-of-way for cell phone towers and billboards
5. developing and charging for the use of recreational facilities with low O&M costs,
such as boat ramps and marinas.
We also discuss an option of the federal government paying a share of the O&M costs of
the HSDRRS. When interviewing officials responsible for levee maintenance in other states,
we learned that the USACE operates and maintains a large share of the flood control
infrastructure along waterways deemed navigable by the federal government, including the
Gulf and Atlantic Intracoastal Waterways. Some of the larger pieces of the HSDRRS are
situated along the Gulf Intracoastal Waterway and, in theory, could be considered a federal
responsibility. Further research by legal experts would be required to assess the viability of
the USACE sharing in the O&M costs for that infrastructure.
We also discuss options relating to consolidation of and revenue-sharing among levee
districts. A number of state governments, including those of Florida and California, play a
larger role than the State of Louisiana in funding O&M costs of levees and other flood
control infrastructure. Other states, also including Florida, have a formal mechanism in place
for revenue-sharing across local levee districts. Given that projected total surpluses may
outweigh total deficits, an appropriately designed revenue-sharing mechanism is one
potential means of covering deficits in those districts threatened by substantial increases in
costs. This mechanism may hold promise for the State of Louisiana.
xiv
Acknowledgments
The author would like to thank the staff at the Coastal Protection and Restoration
Authority for their advice and support. Chip Kline, Charles Sutcliffe, Cynthia Duet, Kyle
Graham, and James McMenis were particularly helpful. The author would also like to thank
the staff of the New Orleans District of the U.S. Army Corps of Engineers for sharing data
and discussing projects, especially Michael Park and Joe Hendrix. Many thanks are also
given to Sally Sleeper, Keith Crane, and Debra Knopman for their advice and support
throughout the course of this project. The author would also like to thank Oliver Wise,
Megan Clifford, Jordan Fischbach, and Lauren Andrews for helpful research assistance.
Shanthi Nataraj, associate economist at the RAND Corporation, and Douglas Woolley,
professor emeritus at Radford University, provided insightful reviews with helpful comments
and suggestions. Finally, the author would like to thank the many Louisiana levee district
leaders and staff members at flood control agencies in other states whom we interviewed for
this study.
xv
Abbreviations
AIWW
CSSF
CPRA
EEED
HSDRRS
IHNC
OCPR
OLS
O&M
PDD
SLFPA
USACE
WCC
Atlantic Intracoastal Waterway
Central and Southern Florida Flood Control Project
Coastal Protection and Restoration Authority
Environment, Energy, and Economic Development Program
Hurricane and Storm Damage Risk Reduction System
Inner Harbor Navigation Canal Surge Barrier
Office of Coastal Protection and Restoration
ordinary least squares
operation and maintenance
Project Description Document
Southeast Louisiana Flood Protection Authority
U.S. Army Corps of Engineers
Gulf Intracoastal Waterway West Closure Complex
xvii
1. Introduction
In the wake of Hurricanes Katrina and Rita, Congress authorized the U.S. Army Corps of
Engineers (USACE) to take on the task of rebuilding and substantially improving the
hurricane protection system in southern Louisiana. The USACE’s Hurricane and Storm
Damage Risk Reduction System (HSDRRS) has been designed to eventually provide flood
protection capable of withstanding a storm with a 1-percent or greater chance of occurrence
in any given year to a portion of southern Louisiana, including the Greater New Orleans
Metropolitan Area.
The federal government is paying the bulk of the construction cost of the HSDRRS.
However, when the system is complete, the responsibilities for conducting and paying for
operation and maintenance (O&M) associated with the new infrastructure will fall on local
government agencies. According to USACE estimates, the majority of O&M costs associated
with the HSDRRS will fall on Louisiana’s levee districts, local districts responsible for
maintaining and operating flood control systems within their jurisdictions.3 Levee districts
have the authority to levy and collect taxes to fund these activities. Faced with the fiscal
uncertainty stemming from the long-term impact that Hurricanes Katrina and Rita will have
on the regional economy, as well as the general economic downturn, state and levee district
leaders need to have a clear idea of what O&M costs are likely to be in each district and the
fiscal capacity of each district to cover the costs of operating and maintaining the new
infrastructure.
In order to assist the levee districts and the State of Louisiana to better prepare for these
financial obligations, this report provides systematic projections of future O&M costs
associated with the HSDRRS that will fall on southern Louisiana’s levee districts. It also
provides projections of ad valorem tax revenues and expenditures on O&M for affected levee
districts through 2016 and discusses some funding approaches that other states and
government agencies have used to finance the costs of operating and maintaining hurricane
and flood control infrastructure.
3
The remaining 46 percent of O&M costs will fall on a number of other government
agencies, including Plaquemines, St. Charles, and Jefferson Parishes, and the New Orleans
Sewage and Water Board.
1
2. Projecting Operation and Maintenance Costs of Hurricane
Protection Infrastructure
In this section, we discuss our methodology for projecting the O&M costs of new
hurricane protection infrastructure associated with the HSDRRS and provide estimates of
O&M costs by new piece of infrastructure and by levee district. We begin by discussing the
data we employ to make projections. Next, we discuss our methodology for projecting O&M
costs. We then provide estimates of O&M costs by piece of infrastructure and by levee
district.
Data
Our analysis employs data on the hurricane and flood protection infrastructure that was in
place before Hurricane Katrina and historical O&M expenditures by levee district. It also
employs detailed data on the specific hurricane and flood control projects that are currently
being constructed by the USACE as part of the HSDRRS. For each levee district in our
analysis, we employ information on acres of levee right-of-way and numbers of floodgates
and pump stations that were maintained by that levee district before Hurricane Katrina. We
also employ information on the O&M expenditures of those levee districts. Prior to our
study, these data had not been aggregated; we assembled these data from a number of sources
specifically for this study.
Data on pre-Katrina infrastructure came from the former Office of Coastal Protection and
Restoration (OCPR), now part of CPRA. OCPR provided us with detailed information on
pre-Katrina infrastructure within Southeast Louisiana Flood Protection Authority (SLFPA)
East and West, as well as Grand Isle, Pontchartrain, South Lafourche, Terrebonne, and
Atchafalaya Levee Districts. Data included the length and height of all levee reaches4 and the
4
We were not given data on acres of levee right-of-way by levee district. We estimated
acres of levees using information on the length and height of all levee reaches within each
levee district. We assume that each levee has a 10-foot crest, a slope of 3:1, and a berm with
a slope of 20:1. Thus, for each reach, we estimate acres of levee right-of-way as:
5, 280 ! miles ! (10 + 25.4 ! height )
43,560
.
This formula is derived under the assumption that 10 percent of the levee’s height is
devoted to the berm. We divide by 43,560 to covert from square feet to acres. We obtain the
3
number of pump stations and floodgates operated by each district before Hurricane Katrina.
Wherever necessary, we supplemented these data with information from maps supplied by
the USACE found in the June 23, 2002, edition of the New Orleans Times-Picayune, levee
district websites, USACE inspection reports, and information obtained during interviews
with levee district leaders. Table A.1 in the appendix shows our data on pre-Katrina
hurricane protection infrastructure by levee district.
Data on infrastructure that will be in place once the HSDRRS is complete came from
multiple sources. Our primary data source for HSDRRS infrastructure is the USACE O&M
cost estimate for the HSDRRS.5 This data source gives detailed information on the
infrastructure associated with the HSDRRS on a project-by-project basis. The USACE also
provided RAND with three maps of projects under way within HSDRRS. The maps have
information about the pre-Katrina height of specific levee reaches, as well as information
about what the final height of those levees will be once construction is complete. The maps
also have information about other specific projects that are under way within HSDRRS,
including specific information about new floodgates, pump stations, and other flood control
and drainage structures. Wherever necessary, we supplemented these data with information
from the USACE’s publicly available Project Description Documents, the USACE HSDRRS
website and interactive project map, and discussions with levee district leaders.
Data on levee district finances came from annual audited financial statements. Audited
financial statements for all state and local government entities are publicly available on the
Louisiana Legislative Auditor’s website (Louisiana Legislative Auditor, various dates).
Annual audited financial statements were available on-line back to 1996 for most levee
districts. From these financial statements, we recorded annual revenue from ad valorem taxes
and annual expenditures on O&M for the years 1996–2009 for all levee districts within
SLFPA East and West, as well as Grand Isle, Pontchartrain, South Lafourche, Terrebonne,
and Atchafalaya Levee Districts.6
total acres of levee right of way in a levee district by adding up the imputed acres of levee
right of way for each reach within the district.
5
The USACE cost estimates are not in a public document but are available to the public
on request. Questions regarding access should be directed to the New Orleans District of the
USACE (askthecorps@USACE.army.mil; Public Affairs, 504-862-2201). In this report, we
provide a description of the USACE’s methodology in Section 2.
6
The format of the financial statements varied considerably across levee districts and
over time, making it difficult to record financial data in a systematic way. While all levee
districts recorded ad valorem revenue separately from other revenue sources, O&M
expenditures were defined differently in different financial statements. For the purposes of
this report, we defined O&M expenditures as the total expenditures from a levee district’s
4
Methodology
We combined two approaches to project the incremental O&M costs of the HSDRRS.
The majority of incremental O&M costs stem from large, newly constructed projects with no
historical precedent in the pre-Katrina system. For these pieces, we use cost-plus
engineering-based O&M cost estimates provided by the USACE. Cost-plus engineeringbased O&M costs means that, for each piece of infrastructure, the USACE attempted to
specify all O&M tasks over the project’s 50-year life cycle, estimated the costs associated
with each task, summed the costs over all tasks, and developed an average annual O&M cost
for each of these pieces of infrastructure in the HSDRRS. We employ these estimates from
the USACE for the following pieces of infrastructure: the Seabrook Control Structure, the
IHNC, the WCC, the Bayou Dupree Floodgate, the Western Tie-In, the Caernarvon Sector
Gate, the Harvey Canal Sector Gate, and the Bayou Segnette Closure Complex. Note that this
list includes all projects with a major sector gate, lock, control, or drainage structure.
The USACE estimates were reviewed by CH2M Hill, an engineering firm employed for
this purpose by what was then OCPR. CH2M Hill generally concurred with the USACE’s
assumptions regarding key O&M tasks. However, through interviews with local levee
districts, CH2M Hill found that the USACE’s estimates for labor costs were higher than what
local levee districts typically pay. CH2M Hill’s estimates suggest that, in some instances, the
USACE estimates for specific maintenance tasks may be as much as 45 percent higher than
what local levee districts will actually pay to cover the O&M costs of the HSDRRS. We thus
investigate a scenario in which O&M costs for the eight pieces of infrastructure listed above
are correspondingly lower than the USACE estimates. The two sets of estimates are used to
establish a range of likely O&M costs for the newly constructed, large and unprecedented
projects associated with the HSDRRS.
The remaining incremental O&M costs of the HSDRRS stem from newly constructed or
significantly altered infrastructure that is similar to the infrastructure that existed prior to
Hurricane Katrina. To estimate the costs of these projects, we employed historical data on
O&M expenditures from 1996 to 2004 (prior to Katrina) and pre-Katrina hurricane protection
infrastructure, by levee district, to estimate the incremental cost of operating and maintaining
typical pieces of hurricane protection infrastructure: levees, floodgates, and pump stations.7
To estimate maintenance costs for these types of infrastructure, we measured levees in terms
of area (acres) and counted the numbers of floodgates and pump stations.
general fund. Expenditures from other funds, including construction and rainy-day funds,
were not coded as O&M expenditures.
7
See “Data” earlier in this section for data sources.
5
To estimate future O&M costs for these types of infrastructure, we constructed a linear
model of O&M expenditures using the statistical technique of ordinary least squares (OLS)
regression. OLS regression is a statistical method of estimating a value—in this case,
expenditures on O&M costs—based on adding together other factors that contribute to that
value (the cost of O&M expenditures). We used the following regression model:
Expit = a1t + a2 ! acresi + a3 ! floodgatesi + a4 ! pumpsi + ei , (Equation 2.1)
where Expit is expenditures on O&M in 2009 constant dollars by levee district i in year t,
acresi is the number of acres of levee right-of-way maintained by levee district i, floodgatesi
is the number of floodgates maintained by levee district i, pumpsi is the number of pump
stations in levee district i, ei is an error term specific to levee district i, and a1t is specific to
each observation year (1996–2004).
The estimates we derived for the terms a2, a3, and a4 become our estimates of the
incremental cost of operating and maintaining an additional acre of levee right-of-way,
floodgate, and pump station, respectively. Note that our model assumes that a levee district’s
O&M costs are a linear function of the specific pieces of infrastructure that the levee district
is responsible for operating and maintaining. Moreover, we do not observe actual O&M costs
by each piece of infrastructure; rather, costs are allocated across the types of infrastructure
using the analytical approach described above.
To estimate the additional costs of maintaining and operating the new infrastructure being
built within the state of Louisiana, we applied these estimates to data on the new
infrastructure associated with HSDRRS: the number of new acres of levee, floodgates, and
pump stations being built within the HSDRRS, excluding large and unprecedented projects.
We added these incremental O&M costs to the USACE’s cost-plus engineering-based cost
estimates for the large and unprecedented projects in each levee district. Using this
information, we estimated the O&M costs that will be borne by each levee district by
assigning each piece of new infrastructure to a specific levee district and summing the
projected O&M costs of all pieces of infrastructure that will ultimately be assigned to that
district.
In our discussions with levee district leaders, we discovered that there is a lack of
consensus surrounding the assignment of infrastructure to levee districts. Importantly, many
of the large and unprecedented pieces of infrastructure with the highest O&M costs span
and/or provide considerable levels of protection to multiple jurisdictions, which significantly
complicates the allocation of costs across those jurisdictions. Specifically, we identified four
major pieces of infrastructure that span levee district boundaries: Inner Harbor Navigation
Canal Surge Barrier (IHNC), the Gulf Intracoastal Waterway West Closure Complex (WCC),
and the Eastern and Western Tie-Ins. The IHNC spans the border of Orleans and Lake
Borgne Levee Districts, but those districts have established an agreement whereby Orleans
will be responsible for 90 percent of the O&M costs associated with the IHNC. The
6
additional three pieces of infrastructure are in the West Bank, and the eventual O&M
responsibility for these pieces of infrastructure is unclear. It appears that the O&M
responsibilities for these pieces of infrastructure will fall on West Jefferson Levee District
(WJLD) and Plaquemines and St. Charles Parishes. However, for the purposes of this report,
we did not include the O&M costs for these pieces of infrastructure in any budget
calculations. As such, the O&M projections for WJLD should be viewed as a lower bound.
According to USACE estimates, the O&M costs associated with these projects is $3 million
to $4 million annually, or roughly one-third of the incremental O&M costs of the entire
HSDRRS. As such, CPRA should make it a priority to determine the O&M responsibilities
for these pieces of infrastructure in the West Bank.
To estimate the total O&M costs associated with the HSDRRS, we added the incremental
O&M costs obtained from the methods described above to baseline O&M estimates derived
by projecting forward each levee district’s average annual O&M expenditures on the preKatrina system over the period 1996–2004.
The primary strength of the approach outlined above is that it is based on historical costs
that were actually borne by levee districts. Since historical costs reflect actual costs incurred,
they reflect local labor and contractor rates as well as the costs of needed supplies and
equipment. We can thus be relatively certain that historical costs will reflect the cost
components that will drive what levee districts will have to pay to cover O&M costs of
similar infrastructure in the future.
A major assumption embedded in the historical cost approach is that the past expenditure
levels by levee districts provided for adequate maintenance. The key concern is that, for
financial reasons, during the period of analysis, levee districts might not have spent enough
to maintain their infrastructure. USACE inspection reports from 1998 through 2004 indicate
that all levee districts in our study were satisfactorily maintaining their hurricane protection
infrastructure prior to Hurricane Katrina. The findings from our interviews with levee district
officials and USACE staff also confirm that levee districts generally performed their O&M
duties at acceptable or higher standards. On this basis, we conclude that past O&M
expenditures are a suitable metric for estimating future costs for similar infrastructure.
Estimates
Estimates of Incremental Costs
Table 2.1 presents our estimates of the incremental costs of maintaining hurricane
protection and flood control infrastructure associated with land area, floodgates, and pump
stations.
7
Table 2.1 Estimates of the Incremental O&M Costs for Hurricane Protection Infrastructure
Infrastructure
Acres
Incremental
Cost
Standard
Error
$140
26
Floodgates
$67,252
5,456
Pump stations
$92,936
28,885
R-squared
N
0.926
69
Standard error represents one standard deviation on either side of the estimated mean of
the incremental cost. R-squared is a measure of how well the linear regression model
explains the variability in the data; N is the number of data points used for estimation. The
results indicate that it costs approximately $140 per year to maintain a typical pre-Katrina
acre of levee right-of-way, $67,252 per year to maintain a floodgate, and $92,936 per year to
maintain a pump station, all expressed in 2009 dollars.
Estimates of Total Expected Cost for O&M
We apply the estimates in Table 2.1 to derive estimates of the total expected cost for
operating and maintaining each new piece of HSDRRS infrastructure. To do so, we use the
total number of additional acres of levee right-of-way, floodgates, and pump stations
associated with each new piece of the HSDRRS that are similar in size and scope to typical
pieces of the pre-Katrina hurricane protection system. For the large pieces of infrastructure
listed in Section 2, we use the USACE cost-plus engineering-based estimates for O&M costs.
We refer to these estimates as the high-cost scenario. We also investigate a scenario in which
O&M costs are 31 percent lower than those determined by the USACE.8 We refer to these
estimates as the low-cost scenario.
By adding up these costs for all new pieces of infrastructure in a levee district, we
estimate the total expected increase in O&M costs that the levee district will incur as a result
of the new HSDRRS infrastructure.9 Similarly, by adding up those costs for all levee
8
If USACE cost estimates are 45 percent more than those calculated by CH2M Hill, then
mathematically, CH2M Hill estimates were 31 percent less than the USACE’s estimates.
Hence, our use of 31 percent to calculate the lower estimate.
9
When a major project spans multiple levee districts, we attempted to assign the
individual pieces of infrastructure associated with the project to the levee district in which it
will be located. So, for example, the IHNC falls in both Orleans and Lake Borgne Levee
Districts. Given that two gates are in Lake Borgne and one in Orleans, we assumed that Lake
8
districts, we estimate the total expected cost to levee districts of maintaining the HSDRRS,
over and above the cost of operating and maintaining the pre-Katrina hurricane protection
system.
Figures 2.1 and 2.2 show projected O&M costs for pre-Katrina and new HSDRRS
infrastructure by levee district under the high- and low-cost scenarios. Again, neither
scenario includes the O&M costs associated with the three district boundary–spanning
projects in the West Bank.10 The estimates for specific pieces of new HSDRRS infrastructure
are reported in the appendix.
Figure 2.1 Estimates for Annual O&M Costs for Pre-Katrina and HSDRRS Infrastructure, by
Levee District, High-Cost Scenario (in millions of dollars)
$25 $20 $15 $10 Annualized O&M on New HSDRRS Infrastructure $5 Annualized O&M on Pre-­‐
Katrina Infrastructure $0 Borgne would cover two-thirds of the O&M costs for the IHNC with the remainder falling on
Orleans Levee District.
10
The three district boundary–spanning projects are the Eastern and Western Tie-Ins, and
the WCC.
9
Figure 2.2 Estimates for Annual O&M Costs for Pre-Katrina and HSDRRS Infrastructure, by
Levee District, Low-Cost Scenario (in millions of dollars)
$25 $20 $15 $10 $5 Annualized O&M Cost on New HSDRRS Infrastructure Annualized O&M Cost on Pre-­‐Katrina Infrastructure $0 Findings
Figures 2.1 and 2.2 indicate that the effects on district O&M budgets from the addition of
post–Hurricane Katrina infrastructure vary substantially by levee district. According to the
information we have received, in East Jefferson Levee District, the USACE is only raising
existing levees and adding foreshore protection along the shore of Lake Pontchartrain. These
tasks will increase the number of acres of levee right-of-way maintained by East Jefferson
Levee District by 172 acres, which will cost roughly an additional $20,000 annually to
maintain.
In contrast, the USACE is constructing several large, new hurricane protection projects in
Lake Borgne Levee District. These projects include the massive control structure with three
floodgates along the Inner Harbor Navigation Canal Surge Barrier (IHNC), ten floodgates
between Bayou Bienvenue and Caernavon, and a floodgate at Bayou Dupree. The USACE is
also raising existing levees, which will add another 727 acres of levee right-of-way to Lake
Borgne Levee District. Our estimates indicate that the cost of operating and maintaining
these additional pieces of infrastructure will be an additional $1.8 million to $2.1 million per
year, which is a large share of Lake Borgne’s current O&M budget.
Our estimates indicate that the levee districts that will incur the largest increases in O&M
costs stemming from new infrastructure currently being constructed by the USACE are
Orleans, Lake Borgne, Terrebonne, and West Jefferson Levee Districts, whose O&M budgets
will increase by roughly $2.8 million, $2.1 million, $1.7 million, and $1.0 million,
10
respectively, under the high-cost scenario. In contrast, our estimates suggest that the O&M
budgets for East Jefferson, Algiers, Pontchartrain, and South Lafourche Levee Districts will
increase by less than $125,000 combined.
11
3. Projections of Budget Balances, by Levee District
In this section, we present our projections of budget balances, by levee district. To project
budget balances, we first build on our estimates from Section 2 to provide estimates of future
O&M costs. Next, we analyze past trends in ad valorem revenue to make informed
projections of future growth in ad valorem revenue. We use these projections of costs and
revenues to project budget balances through 2016 under two scenarios for the evolution of
property values.
Projecting Future Operation and Maintenance Costs for the HSDRRS
Our cost projection model described in Section 2 provides the backbone for projecting
the O&M costs of the HSDRRS. However, to make long-term cost projections, we must
make an assumption about the rate of growth of O&M costs of existing hurricane protection
infrastructure through 2016. To inform our assumptions about future growth in O&M costs,
we examine trends in O&M costs by levee district before Hurricane Katrina. These trends are
presented in Figures 3.1 through 3.3.
Our data indicate that, from 1996 to 2004, O&M expenditures increased in constant
prices for every levee district except WJLD. There are two possible reasons that O&M
expenditures increased prior to Katrina. The first possible reason is that the costs of operating
and maintaining existing hurricane protection infrastructure may have been rising more
rapidly than the average inflation rate. This might have happened because of increases in
wages of workers or other costs required to operate and maintain hurricane protection
infrastructure above and beyond the rate of inflation. The increases might also have been due
to increased needs for maintenance as levees, pumps, and water gates aged.
The second possible reason is that increases in O&M expenditures might have reflected
an expansion of the hurricane protection system before Katrina. In this case, increases in
O&M expenditures do not reflect growth in O&M costs for the existing hurricane protection
system. Rather, they reflect increases in costs to operate and maintain an expanded hurricane
protection system.
Our data indicate that the two levee districts with the highest growth rates in O&M
expenditures from 1996 to 2004 were Terrebonne and South Lafourche, reporting average
annual rates of increase of 22 percent and 8 percent, respectively. During that period, South
Lafourche and Terrebonne constructed the Larose to Golden Meadow and Morganza to the
Gulf projects, respectively. In contrast, the annual growth rate in O&M expenditures in
constant prices was close to zero in other districts where little or no additional hurricane
13
protection infrastructure was constructed. For example, the average annual rate of growth in
expenditures on O&M was approximately 0.6 percent for East and West Jefferson and
Orleans. Since those districts were also adding infrastructure, the annual growth rate in O&M
expenditures for existing infrastructure was likely even lower. Thus, we conclude that most
of the increase in O&M expenditures in our data reflects growth in the pre-Katrina hurricane
protection system, as opposed to higher-than-average inflation in the O&M costs. Thus, our
projections assume that O&M costs for existing hurricane protection systems are flat over
time in constant prices.
Figure 3.1 Operation and Maintenance Expenditures (1996–2004): East Jefferson, Lake
Borgne, Pontchartrain, Terrebonne, and West Jefferson Levee Districts (in millions of dollars)
6 5 East Jefferson 4 Lake Borgne 3 Pontchartrain 2 Terrebonne 1 2004 2003 2002 2001 2000 1999 1998 1996 1997 West Jefferson 0 SOURCE: Louisiana Legislative Auditor, various years.
Figure 3.2 Operation and Maintenance Expenditures (1996–2004): Grand Isle and South
Lafourche Levee Districts (in millions of dollars)
1.4 1.2 1 0.8 Grand Isle 0.6 South Lafourche 0.4 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 0.2 14
Figure 3.3 Operation and Maintenance Expenditures (1996–2004): Orleans Levee District (in
millions of dollars)
25 20 15 Orleans 10 2004 2003 2002 2001 2000 1999 1998 1997 0 1996 5 SOURCE: Louisiana Legislative Auditor, various years.
Trends in Ad Valorem Revenue, by Levee District
To make projections of budget deficits, we must make assumptions about the levels and
future growth rates in ad valorem revenues. Unfortunately, events such as Hurricane Katrina,
the Deepwater Horizon oil spill, and national increases in housing prices until 2008 make it
difficult to accurately forecast future ad valorem revenues. To help inform our assumptions
about future growth in ad valorem revenues, we begin by examining past trends. In doing so,
we pay close attention to the extent to which ad valorem revenues declined after Hurricane
Katrina and the extent to which revenues have rebounded since. Figures 3.4 to 3.6 present
trends in ad valorem revenue by levee district from 1996 to 2009. Note that the vertical
scales of the figures vary depending on the size of the levee district.
15
Figure 3.4 Ad Valorem Revenue (1996–2009): East Jefferson, Lake Borgne, Pontchartrain,
Terrebonne, and West Jefferson Levee Districts (in millions of dollars)
East Jefferson Lake Borgne Pontchartrain West Jefferson Terrebonne 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 9 8 7 6 5 4 3 2 1 0 SOURCE: Louisiana Legislative Auditor, various years.
Figure 3.5 Ad Valorem Revenue (1996–2009): Grand Isle and South Lafourche Levee Districts
(in millions of dollars)
3.5 3 2.5 2 Grand Isle 1.5 South LaFourche 1 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.5 SOURCE: Louisiana Legislative Auditor, various years.
16
Figure 3.6 Ad Valorem Revenue (1996–2009): Orleans Levee District (in millions of dollars)
30 25 20 15 Orleans 10 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 0 1996 5 SOURCE: Louisiana Legislative Auditor, various years.
There are several points to take away from Figures 3.4 to 3.6. First, Hurricane Katrina
affected levee districts in different ways. While some districts experienced significant
declines in ad valorem revenue immediately following Hurricane Katrina, others experienced
above-average growth. The districts with the greatest percentage declines in ad valorem
revenues were Orleans and Lake Borgne, where real ad valorem revenue collections declined
by 40 percent and 34 percent, respectively, from 2005 to 2006. In contrast, real ad valorem
revenue in Pontchartrain Levee District increased by 11 percent from 2005 to 2006, well
above the pre-Katrina growth rate of 0.7 percent.
Second, ad valorem revenues in those levee districts with declines following Hurricane
Katrina have generally surpassed pre-Katrina levels. For example, ad valorem revenue in
Orleans Levee District declined from $27 million to $15 million from 2005 to 2006 but
returned to $28 million in 2009. The one exception is Lake Borgne, where ad valorem
revenue was still 18 percent below its pre-Katrina level of $4.2 million in 2009.
In many cases, growth rates in ad valorem revenues are well above pre-Katrina rates. For
example, East Jefferson’s ad valorem revenue grew at a 0.6-percent annual rate from 1996 to
2004 but experienced a 12.7-percent annual growth rate from 2007 to 2009. The key
exceptions are South Lafourche, where construction was slowing on the Larose to Golden
Meadow Project, and WJLD, where ad valorem revenue growth has remained relatively flat.
Outlook for Growth in Ad Valorem Revenue through 2016
To project revenue from ad valorem taxes, we must make assumptions about the future
rate of growth of property values across levee districts. While our data suggest a general
upward trend in ad valorem revenues and above-average growth in ad valorem revenues
17
since Hurricane Katrina through 2009, we do not believe that these trends will persist in the
near term. First, the above-average growth rates in recent years occurred during years of
significant rebuilding and population growth as residents returned to southern Louisiana. As
this process wanes, property values will begin to stabilize. Indeed, the most rapid growth in
ad valorem revenues occurred in 2006; growth rates have fallen since that year.
Second, the economic recession, which was precipitated by significant declines in
housing prices nationally, has affected property values in southern Louisiana as well. Our
current data are based on audited financial statements of ad valorem revenue collected in
2008, which largely reflect property values assessed prior to the recent drop in housing
prices. While property values have continued to appreciate in the city of New Orleans, most
of southern Louisiana has experienced declining housing prices since 2008. As these
properties are reassessed, ad valorem revenues will fall.
In light of these considerations, we base our projections of ad valorem revenues on two
different scenarios for growth rates through 2016: 0-percent growth and 2-percent growth.
The 2-percent growth scenario represents a case in which ad valorem revenue growth
stabilizes at pre-Katrina levels. The median pre-Katrina growth rate for ad valorem revenue
across the levee districts in our study was roughly 2 percent. The 0-percent growth scenario
represents a case in which declining housing values stemming from the current economic
downturn hold property values down in the medium term. The projections based on the 0percent growth scenario are also useful for understanding the effect of the HSDRRS on
budget deficits when ad valorem revenues are held constant.
Projected Budget Balances, by Levee District
Figure 3.7 presents our projections for budget balances in 2016 by levee district under
four scenarios:
• high O&M costs and 0-percent real growth in ad valorem revenue
• high O&M costs and 2-percent real growth in ad valorem revenue
• low O&M costs and 0-percent real growth in ad valorem revenue
• low O&M costs and 2-percent real growth in ad valorem revenue.
More-detailed information showing how these figures were derived are presented in the
appendix. Note that our budget projections for Orleans Levee District assume that the Special
Levee Improvement Tax will be renewed in 2015.
18
Figure 3.7 Projected Budget Balances, by Levee District, Under Four Scenarios (in millions of
dollars)
$30 $25 $20 $15 High O&M Cost and Constant Property Values $10 High O&M Cost and 2% Growth in Property Values $5 $0 -­‐$5 Low O&M Cost and Constant Property Values Low O&M Cost and 2% Growth in Property Values Figure 3.7 suggests that there is considerable variance in projected budget balances
across levee districts. Lake Borgne Levee District is expected to run a deficit of up to
$2 million per year in constant dollars, or up to 57 percent of projected ad valorem revenue,
depending on the scenario. Assuming that none of the O&M responsibilities associated with
the WCC and the Eastern and Western Tie-Ins will fall on WJLD, WJLD will likely break
even or experience a modest surplus in 2016. However, if a significant share of the O&M
costs associated with the district boundary–spanning projects in the West Bank falls on
WJLD, WJLD may experience significant deficits. In contrast, East Jefferson and Orleans
Levee Districts are projected to run surpluses of between $3.8 million and $7.6 million under
the high-cost and 0-percent growth scenario. We project Pontchartrain and South Lafourche
both to have small surpluses under all scenarios. We project that Terrebonne will roughly
break even under all scenarios.
Under all of the scenarios, we find that, in the aggregate, the levee districts in our study
will break even or have a modest combined surplus, depending on the scenario. In all but one
scenario, both SLFPA East and West are projected to break even or have aggregate surpluses
on their own. However, we find that some levee districts are projected to have large budget
deficits in coming years.
19
Limitations on the Projections of Operation and Maintenance Costs and
Budget Deficits
There are several limitations of our analysis. First, our analysis assumes that the USACE
estimates for O&M costs for large and unprecedented HSDRRS infrastructure are accurate.
We have not conducted an independent review of these estimates, but, as a consequence of a
review conducted by CH2M Hill suggesting that the USACE estimates may be as much as
45 percent too high because of their assumptions regarding labor costs, we investigated a
low-cost scenario in which O&M costs for large and unprecedented infrastructure pieces are
assumed to be 31 percent less than corresponding USACE estimates.11
Second, our data on the new hurricane protection infrastructure may be incomplete.
While we have taken great care to gather information on the major pieces of infrastructure
included in the HSDRRS, there may be smaller projects that are not mentioned in our
primary data sources and were not discussed in our conversations with USACE and levee
district officials. We expect such projects to be small in size and scope and that they will
therefore contribute little to future O&M costs.
Third, our analysis does not distinguish between floodwalls and earthen levees: We treat
a mile of earthen levee the same as a mile of floodwall of equal height. For example, we
assume that the cost of maintaining a mile of 10-foot floodwall is the same as that of
maintaining the acreage of levee right-of-way that a mile of 10-foot earthen levee would
encompass. We need to make this assumption because levee districts with extensive
floodwalls also tend to have extensive earthen levees, so it is impossible to distinguish
statistically between the cost of operating and maintaining earthen levees and floodwalls. We
do not believe this to be a major concern for projecting O&M costs because floodwalls and
earthen levees are highly correlated. Thus, our methodology implicitly controls for the
typical mix of earthen levees and floodwalls. As long as the mix before Katrina is roughly
equivalent to what it will be after Katrina, our methodology should yield accurate cost
projections.12
11
If USACE cost estimates are 45 percent more than those calculated by CH2M Hill,
then mathematically, CH2M Hill estimates were 31 percent less than the USACE’s estimates.
Hence, our use of 31 percent to calculate the lower estimate.
12
Note that, in some cases, HSDRRS projects involved building a concrete floodwall on
top of an existing or expanded earthen levee. In these cases, we assumed that a levee with a
floodwall on top would cost the same to maintain as a levee of the combined height of the
floodwall and levee. Using our conversion of levee height to footprint, this leads to a
corresponding higher figure for levee acreage and hence cost.
20
Fourth, our analysis does not distinguish between floodgates and navigation gates. This is
appropriate so long as the distribution of types of gates in the pre-Katrina system is similar to
that after Katrina. To account for differences in costs with large sector gates, we used
USACE cost accounting–based estimates for features that include sector gates. Any other
differences in the distribution of gate types that alter average O&M costs per gate in the preKatrina and current systems are not reflected in our estimates.
Fifth, there is considerable uncertainty surrounding the completion dates of USACE
projects as well as dates for specific O&M tasks, and we do not have accurate data on
expected project completion or task dates. Thus, we do not attempt to model the completion
of HSDRRS projects or dates for specific maintenance functions and instead project the
average annual O&M costs of a complete and static HSDRRS. While the USACE or levee
districts may need to build additional projects beyond the current system at a later date, such
projects are beyond the scope of our analysis.
Sixth, the O&M costs of periodic O&M functions, such as levee lifts, armoring, and
scouring, are included in our analysis to the extent that levee districts performed those tasks
prior to Hurricane Katrina. Any changes in the extent of or costs associated with these tasks
that lead to real O&M cost differences will not be reflected in our estimates.
Seventh, our projections of deficits in ad valorem revenue are based on the assumption
that the growth rate of O&M costs of a static hurricane protection system in constant prices is
zero. This assumption appears appropriate based on examination of growth rates in O&M
expenditures pre-Katrina in constant prices. If, however, there is real inflation in O&M costs
over time, then our projections of budget balances in ad valorem revenue are biased upward.
Eighth, our projections of budget balances in ad valorem revenue are based on the
assumption that, in constant prices, ad valorem revenue will grow by 0 percent or 2 percent
annually over the medium term. The 2-percent scenario represents a return to the median preKatrina growth rate of ad valorem revenue in levee districts that were not experiencing rapid
growth in hurricane protection infrastructure from 1996 to 2004. The 0-percent growth
scenario represents a case in which economic uncertainty stemming from the current
housing-induced recession holds property values constant in the medium term. If the true
growth rate of ad valorem revenue is higher than 2 percent, then our projections of budget
balances in ad valorem revenue are biased downward and therefore would be lower than
actual; if the true growth rate is lower than 0 percent annually (meaning a decline in revenue
growth), then our projections are biased upward and therefore would be higher than actual.
Finally, our estimates for budget balances do not include the O&M costs associated with
the WCC and the Eastern and Western Tie-Ins, which are partly contained within or provide
significant protection to WJLD. Our conclusion that WJLD will break even or experience a
modest surplus in 2016 relies crucially on the assumption that the O&M costs for these
pieces will fall on other jurisdictions, including Plaquemines and St. Charles Parishes.
21
Should a significant share of the O&M costs associated with these projects fall on WJLD,
WJLD and SLFPA West will experience budget deficits without additional revenue.
22
4. Approaches That Other States Have Tried for Financing
O&M Costs of Levee and Hurricane Protection Infrastructure
In this section, we discuss approaches that other states and local government agencies
have used to finance the O&M costs of levees and hurricane protection infrastructure. We
used several sources of information to collect data on these other states’ approaches. In our
interviews with levee district leaders from Louisiana, we discussed revenue sources and
probed for revenue sources currently used by levee districts other than ad valorem taxes. We
examined the websites of a number of state and local sponsors of federal flood control
projects, as well as general state flood control and water management agencies. We also
interviewed individuals in charge of operating and maintaining flood control projects in the
states of Mississippi, Florida, Texas, and California. We chose to concentrate on these states
because, like Louisiana, they are prone to flooding and other disasters and have significant
flood control infrastructure in coastal areas and along navigable waterways.
We found that flood control agencies generate most of their revenue for day-to-day O&M
from ad valorem or other forms of property taxation. Excluding federal and state grants and
interest on financial assets, very few of the agencies with which we communicated receive
more than 10 percent of their revenue from local sources other than ad valorem or other
forms of property taxation. Nevertheless, we did identify some approaches that government
agencies have used to finance the O&M costs for levee and other hurricane protection
infrastructure. These approaches fall into three general categories:
1. other states’ uses of levee rights-of-way
2. request for additional funds from the federal government
3. cost-sharing between or consolidation of levee districts.
Other States’ Uses of Levee Right-of-Way
A number of levee districts in Louisiana and flood control agencies in other states
generate revenue through those states’ uses of levee rights-of-way and other land holdings
owned by the district. Approaches that have shown promise in Louisiana and other states
include the following:13
13
It is important to note that increasing development within levee rights-of-way may lead
to more damage in future storm events, and may negatively impact the ability of levee
districts to respond to flood control needs. This tradeoff must be balanced against the benefit
23
1. Strategic leasing of prime levee rights-of-way to casino and other commercial
developers. The strategy has generated significant revenues in the state of
Mississippi, where the Mississippi Yazoo Levee District generates all revenue
necessary to cover its O&M responsibilities from strategic leases of levee rights-ofway in desirable urban areas to casino developers. While Mississippi has concentrated
on development by casino interests, development by other commercial interests such
as hotel chains and high-density residential developers is also a possibility. The
potential revenue from such relationships is considerable in high-traffic tourist
destinations such as New Orleans, but districts must be careful to retain sufficient
undeveloped right-of-way to accommodate future flood- and hurricane-protection
projects.
2. Leasing of levee right-of-way for passive or agricultural use. This strategy has
shown promise in Mississippi, where the Mississippi Levee Board generates $10 to
$15 per acre per year for hunting leases, $5 to $10 per acre for grazing and pasture
leases, and $50,000 per year from timber sales. These relationships generally place
little strain on the day-to-day operations of levee maintenance crews. Indeed, our
interviewees suggest that leases often contributed to maintenance because the lessee
often cleared brush for hunting and grazing. While the potential revenue from such
relationships is modest, it could help alleviate budget deficits in hard-hit districts with
prime hunting or grazing land, such as Terrebonne, South Lafourche, Plaquemines,
and St. Bernard Levee Districts. However, some levee district leaders were concerned
that this approach could limit their ability to effectively operate and maintain levee
district right-of-way.
3. Selling off levee rights-of-way and retaining conservation easements. This idea
was mentioned in discussions with levee district leaders in Mississippi, and could
have the potential to generate considerable revenue. Levee districts could sell all
levee rights-of-way to interested parties but maintain the development rights to that
property in the form of a conservation easement, which places development and other
restrictions as agreed that last into perpetuity.
4. Leasing levee rights-of-way for cell phone towers and billboards. This strategy
has been debated in the state of Florida and has the potential to generate modest
revenue in urban districts that, like St. Bernard and WJLD, have levees in close
proximity to dense populations.
of additional revenue. Only in cases where potential revenues are high relative to the
potential for future damage and disruption should levee districts consider these options.
24
5. Developing and charging for the use of recreational facilities with low O&M
costs. This strategy has been successful in Orleans Levee District, where revenue
from two district-owned marinas on Lake Pontchartrain and a regional airport have
generated revenue for years. Similarly, the state of Florida operates a number of boat
ramps in strategic areas that have the potential to generate modest revenues at low
operating costs. The Mississippi Levee Board generates revenue by charging barges
for the right to park against the riverbank in high-traffic areas. Note, however, that, if
levee districts or the state of Louisiana elect to pursue this route, sites and activities
must be chosen so that the revenue generated from the sites is greater than the
construction and operating costs. There is evidence that, as a general rule, parks and
other public facilities tend to cost more to operate than they generate in revenue, so
the net revenue-generating capacity of this option may be limited (Bowker, Cordell,
and Johnson, 1999).
Based on our interviews with state flood control and water management agencies in other
states, we conclude that the revenue-generating capacity of strategies related to other states’
use of levee right-of-way is limited. Most agencies generate less than 10 percent of revenues
from those states’ uses of levee rights-of-ways. However, as shown by the success of such
transactions in Mississippi, districts with levees near prime commercial real estate, such as
Orleans, could generate significant revenue from strategic development of excess rights-ofway. Similarly, as shown by the success of marinas and the Lakefront Airport in Orleans
Levee District, considerable revenue may be generated by developing strategically placed
recreational facilities with low construction and operating costs.
The revenue-generating capacity of such options is also limited by the extent of levee
right-of-way that is owned outright by levee districts versus that held through easements. For
example, there are two levee districts in Mississippi. The Mississippi Yazoo Levee District
owns most of its levee rights-of-way, while the Mississippi Levee Board maintains most of
its levee rights-of-way through easements. Mississippi Yazoo leases rights-of-way to casino
operators for substantial sums of money, and has no ad valorem taxes. The Mississippi Levee
Board does not have this possibility because it does not own the rights-of-way. It generates
90 percent of its revenues from ad valorem taxes. In most cases in Southern Louisiana, levee
right-of-way is retained by levee districts only in the form of easements, so the revenuegenerating potential of these options may be limited.
Requesting Assistance from the Federal Government for Maintaining
Infrastructure Along Navigable Waterways
In our interviews, we discovered that, in many states, the USACE takes full responsibility
for operating and maintaining flood control infrastructure along navigable waterways,
25
including the Gulf and Atlantic Intracoastal Waterways. This is true in Florida, where the
USACE operates all locks and floodgates along the Gulf Intracoastal Waterway that are
associated with the USACE’s Central and Southern Florida Flood Control Project (CSSF).
As is true for the HSDRRS, the USACE built the CSSF but local authorities are responsible
for operating and maintaining the infrastructure. However, unlike the situation with
HSDRRS, the USACE maintains O&M responsibilities for the infrastructure along the Gulf
Intracoastal Waterway.
Navigation is one of the core responsibilities of the USACE. According to its mission
statement, “The responsibility of the U.S. Army Corps of Engineers is to facilitate the safe,
reliable and economically efficient movements of vessels, and it does so by constructing and
maintaining navigation channels and harbors, and regulating water levels on inland
waterways.” Some in Louisiana have argued that the USACE should be responsible for
maintaining the flood control infrastructure along Louisiana’s portion of the Gulf Intracoastal
Waterway. This would include several of the large new pieces of infrastructure that will be
assigned to Lake Borgne and West Jefferson Levee Districts, including the IHNC and WCC,
and possibly the Seabrook Control Structure along the Inner Harbor Navigation Canal.
Further research by legal experts would be required to assess the viability of this option.
Cost-Sharing Between or Consolidation of Levee Districts
Our projections indicate that most levee districts will be able to cover increased O&M
costs stemming from the new infrastructure being constructed with existing revenues.
However, Lake Borgne is projected to incur substantial budget deficits in the coming years.
One possible solution to these shortfalls would be to consolidate districts in surplus with
districts where O&M costs are projected to increase sharply.14
Our interviews with flood control agencies in other states suggest that Louisiana has
many more levee districts than other states. Florida has six regional water management
districts. Water management districts are made up of basin boards, which are similar to
Louisiana levee districts but are responsible for maintaining flood control infrastructure
within an entire drainage basin. Water management districts and basin boards both levy an ad
valorem tax, but the water management district allocates its collections across the basin
boards under its jurisdiction in accordance with need. Mississippi has just two large levee
districts. In general, no state that we examined delegates the O&M responsibilities of flood
14
It is important to note that consolidating levee districts would most likely lead to
redistribution of resources from resource-rich to resource-poor districts. Although this would
help resource-poor districts meet their O&M needs, it could handicap resource-rich districts.
26
control infrastructure to local taxing districts with jurisdictions as small as Louisiana’s local
levee districts. Economic theory suggests that, in cases in which there are spillovers and
externalities between local jurisdictions, such as in the case with flood control, government
oversight is optimally handled at a higher level (Oates, 1973).
Our discussions with levee districts and state leaders in Louisiana suggest that there is
little support for outright consolidation of levee districts, particularly beyond basin
boundaries. Levee districts are concerned about giving away so much local control that they
are unable to deal effectively with local problems in a timely fashion. They are also
concerned that such a change would simply redirect funds from property-rich districts to
property-poor districts; this is seen as unfair, even within property-poor districts. Among
levee district leaders who were amenable to the idea of consolidation, there was strong
support for the idea that any consolidation should not expand beyond basin boundaries. So,
for example, SLFPA West may incorporate portions of Plaquemines Parish and St. Charles
Parish that are within the West Bank Basin and contain major pieces of HSDRRS
infrastructure, including the WCC and the Eastern and Western Tie-Ins, so long as the
incorporated territory would contribute to the SLFPA West’s tax base.15
One final option would be to build upon the SLFPA model and give SLFPA East and
West the authority to transfer funds between constituent levee districts. Since the projected
surpluses in Orleans and East Jefferson surpass the projected deficits in Lake Borgne, this
model could effectively solve Lake Borgne’s problems. Similarly, we project Algiers to have
revenue surpluses through 2016, which would help make up for the potential deficits in
WJLD. Another option would be to consolidate SLFPA East and West and grant the
authority to channel funds between all constituent districts. Because the surpluses in East
Jefferson and Orleans are expected to be larger than the deficits in Lake Borgne, such an
arrangement could alleviate near-term revenue shortfalls in that district. Our interviews with
levee district officials suggested general support for building upon the SLFPA model,
particularly for giving SLFPA East and West the authority to reallocate funds among levee
districts within their respective jurisdictions. However, there was less support for
consolidating SLFPA East and West because they protect separate basins.
15
The logic is that the flood control infrastructure within a basin is interconnected so that,
if one piece of infrastructure within a basin fails, it can cause flooding and other damage in
other parts of the basin. Thus, levee districts within a single basin depend on each other to
maintain their respective infrastructure. Thus, some stakeholders argued that planning for
hurricane and flood protection is most effectively managed at the basin level.
27
5. Findings
In the wake of Hurricanes Katrina and Rita, the USACE is in the process of rebuilding
and improving the hurricane protection system in southern Louisiana. The HSDRRS has
been designed such that, when it is complete, it will provide protection capable of
withstanding a storm with a 1-percent or greater chance of occurrence in any given year.
This report provides data-driven estimates of O&M costs associated with the new
HSDRRS that will be borne by Louisiana’s levee districts:
• For the large and unprecedented pieces of infrastructure being built by the USACE,
we used cost-plus engineering estimates of O&M costs provided by the USACE and
CH2M Hill.
• For new or significantly altered infrastructure that is similar in size and scope to that
included in the pre-Katrina system, we used pre-Katrina data on hurricane protection
infrastructure and expenditures on O&M to statistically estimate the incremental cost
of operating and maintaining an acre of levee right-of-way, a floodgate, and a pump
station.
• We assigned the incremental costs for all HSDRRS infrastructure wholly contained
within a single levee district to the appropriate levee district and incorporated those
estimates into projections of annual O&M costs through 2016.
• We also projected ad valorem revenue through 2016 and analyzed the projected
surpluses in ad valorem revenue by levee district.
• Finally, we discussed approaches that state and local government agencies in
Louisiana and other states are using to generate revenue to finance the O&M costs of
levee and hurricane protection infrastructure.
This analysis yields the following findings:
1. There is considerable variance in incremental O&M costs stemming from new
HSDRRS infrastructure across levee districts. For example, Orleans Levee District’s
O&M costs are expected to increase by $2.0 million to 2.8 million, while East
Jefferson’s are expected to increase by just $20,000.
2. The maximum increase in O&M costs as a consequence of new HSDRRS
infrastructure will be 78 percent or less of pre-Katrina O&M expenditures in all
districts. In Lake Borgne, incremental O&M costs of new infrastructure associated
with HSDRRS under the high-cost, low-growth scenario are expected to run roughly
$2.1 million, 78 percent more than pre-Katrina O&M expenditures.
29
3. There is a lack of consensus surrounding the allocation of O&M responsibilities for
three major pieces of infrastructure in the West Bank with a combined O&M cost of
$3 million to $4 million annually. Levee districts, CPRA, and other stakeholders
should work to determine the ultimate responsibility for these O&M costs. Should
significant portions of the O&M responsibility for this infrastructure fall on WJLD,
WJLD will need to raise additional revenues to avoid significant budget deficits.
4. Levee district ad valorem revenues have generally rebounded since Hurricane
Katrina. In some cases, growth in ad valorem revenues in the years since Hurricane
Katrina has been well above pre-Katrina rates. For example, East Jefferson’s ad
valorem revenue grew at a 0.6-percent annual rate from 1996 to 2004 but experienced
a 12.7-percent annual growth rate from 2007 to 2009. The one exception to this
general trend is Lake Borgne, where ad valorem revenue still has not returned to preKatrina levels in constant prices and growth in revenue has been just 5.3 percent
annually since 2007.
5. Levee districts vary considerably in terms of projected surpluses in ad valorem
revenue in the medium term, but the overall fiscal condition of levee districts is likely
to be solid. Although Lake Borgne is projected to have deficits in 2016 of up to
$2 million depending on the scenario, projected surpluses in other levee districts
surpass these deficits. In aggregate, we project that the levee districts studied in our
report will either break even or show a modest combined surplus in 2016, depending
on our assumptions about the growth of ad valorem revenue and O&M costs for large
and unprecedented pieces of infrastructure.
6. Most levee districts in Louisiana and flood control agencies in other states rely on ad
valorem or other forms of property taxation for most of their income. Other forms of
income account for 10 percent or less of revenues. However, many state and local
governments generate significant revenues through their uses of levee rights-of-way.
Options include leasing levee rights-of-way in high-rent areas to commercial
interests, leasing levee rights-of-way for passive and agricultural purposes or
billboards and cell phone towers, outright sale of levee rights-of-way while retaining
appropriate conservation easements, and developing and charging for use of
recreational property with relatively low construction and operating costs.
7. Given that the overall fiscal health of levee districts appears strong through 2016, the
state might consider actions surrounding the consolidation of levee districts. One
option that might be acceptable to levee districts would be to grant SLFPA East and
West the authority to shift funds between constituent districts. Given that the
projected surpluses in Orleans and East Jefferson would more than cover the
projected deficits in Lake Borgne, and the modest surplus in Algiers would just offset
modest potential deficits in WJLD, such an option could solve funding concerns
30
through 2016. Leaders at both SLFPA East and West voiced concerns over their
inability to shift funds between their constituent districts.
8. Given that there is a precedent for the USACE retaining maintenance responsibilities
for flood control infrastructure along navigable waterways as part of its responsibility
for navigation, there may be an opportunity for the state and the USACE to consider
changes in the current allocation of O&M costs of infrastructure along the Gulf
Intracoastal Waterway, Inner Harbor Navigation Canal, and other navigable
waterways.
31
Appendix
Table A.1 Pre-Katrina Hurricane Protection Infrastructure, by Levee District
Levee
District
East Jefferson
Grand Isle
Lake Borgne
Orleans
Pontchartrain
South Lafourche
WJLD
Atchafalaya
Terrebonne
Floodg
ates
12
0
15
200
3
8
23
0
2
Pump
Stations
16
0
8
37
3
6
22
0
0
Acres of
Levee
1,707
429
2,733
6,072
9,267
1,361
2,393
29,436
517
33
Table A.2 Estimates of Annual Incremental O&M Costs for HSDRRS Infrastructure, by Levee District
Levee
District
Orleans
Task
Additional
Acres of
Levee
Additional
Pump
Stations
Additional
Other
Floodgates
Share Unprecedented
Projects
Total
USACE
Cost ($)
O&M Cost O&M Cost
(High) ($)
(Low) ($)
Foreshore
protection
100
0
0
100
13,765
13,765
Raise levee
986
0
0
100
135,723
135,723
Seabrooke
0
0
3
100
X
IHNC-01
1,245,207
1,245,207
858,763
IHNC
71
0
1
90
X
IHNC-02
1,509,129
1,358,216
936,701
Total
1,157
0
3
2,752,911
1,944,952
Caernavon to
Bayou Bienvenue
0
0
13
100
959,128
959,128
Raise levee
727
0
0
100
100,072
100,072
Caernavon sector
gate
0
0
1
100
X
LPV-049
(sector
gate Only)
433,135
433,135
298,714
IHNC
71
0
2
10
X
IHNC-02
1,509,129
150,913
104,078
Bayou Dupree
floodgate
0
0
1
100
X
LPV-144
499,569
499,569
344,530
Total
798
0
14
2,142,817
1,806,522
Foreshore
protection
100
0
0
100
13,765
13,765
Raise levee
72
0
0
100
9,911
9,911
Total
172
0
0
23,676
23,676
SLFPA East
Total
2,127
0
17
4,919,404
3,775,150
WJLD
Raise levee
284
0
0
100
Harvey Canal
0
0
1
100
Lake Borgne
East
Jefferson
0
X
LPV 47.1
471,581
471,581
325,228
34
Levee
District
Algiers
SLFPA West
Task
Total
HSDRRS
Additiona
l Other
Floodgates
7
1
1
Total
659
4
9
Raise levee
37
0
0
Total
37
0
Total
696
S
hare
X
Projec
ts
WBV 16.2
Total
USACE
Cost ($)
477,463
O&M
Cost
(High) ($)
O&M
Cost (Low)
($)
329,285
949,044
654,513
5,093
5,093
0
5,093
5,093
4
9
954,137
659,606
North of Airline Hwy 134
0
0
100
18,445
18,445
Additional pump
stations
0
2
0
100
121,411
121,411
4
0
6
100
X
LPV-07b.2
207,408
207,408
143,040
24
0
2
100
X
LPV-07c.2
119,962
119,962
82,732
Alameda/Walker
5
drainage structures
0
2
100
X
LPV-07d.2
121,907
121,907
84,074
Total
134
0
0
589,134
449,703
Morganza to Gulf
2,526
7
12
1,657,993
1,657,993
Total
2,526
7
12
1,657,993
1,657,993
Larose to Golden
Meadow
477.86
0
0
65,777
65,777
Total
477.86
0
0
65,777
65,777
8,186,445
6,608,229
Total
100
Unprecede
nted
477,463
St. Rose drainage
structure
South
Lafourche
Addition
al Pump
Stations
Bayou Segnette
Pontchartrain Cross Bayou
drainage structure
Terrebonne
Addition
al Acres of
Levee
100
100
100
SOURCES: Primary data provided by OCPR and supplemented with maps provided by the USACE and found in the New Orleans Times-Picayune.
35
Table A.3 Major HSDRRS Infrastructure with Multiple Potential Operators
Task
Additional
Acres of Levee
Additional
Pump Stations
Additional
Other Floodgates
Potential
Operators
Unprecede
nted
Project
s
O&M
Cost (High)
($)
O&M
Cost (Low)
($)
Eastern Tie-In
48
4
2
Plaquemines Parish,
WJLD
X
WBV 12,
09A-C
633,911
437,180
Gulf Intracoastal
Waterway
0
1
3
Plaquemines Parish,
WJLD
X
WBV 90
2,445,474
1,686,534
Western Tie-In
320
0
4
Plaquemines Parish,
St. Charles Parish
X
WBV 71-76, 1,083,593
17.b2
Total
368
5
9
4,162,978
747,306
2,871,019
SOURCE: USACE cost estimate for the HSDRRS (USACE methodology described in Section 2).
36
Table A.4 Projected Budget Balances, by Levee District
O&M Costs ($ millions)
District
Orleans
PreKatrina
Infrastructure
17.73
New
HSDRRS
Infrastructure
(High)
New
HSDRRS
Infrastructure
(Low)
Ad Valorem
Revenue ($ millions)
Const
ant
Property
Values
2%
Growth
Rate of
Property
Values
Surplus ($ millions)
High
O&M Costs
High
Low
Low O&M
and 2%
O&M Cost
O&M Costs Costs and 2%
Property
and Constant
and Constant
Property
Value Growth
Property
Property
Value Growth
Rate
Values
Values
Rate
2.75
1.94
27.88
32.03
7.40
11.55
8.21
12.36
East Jefferson 4.44
0.02
0.02
8.30
9.53
3.84
5.07
3.84
5.07
Lake Borgne
3.02
2.37
1.96
3.42
3.93
(1.97)
(1.46)
(1.56)
(1.05)
SLFPA East
Total
25.19
5.14
3.92
39.60
45.49
9.27
15.16
10.49
16.38
WJLD
2.98
0.99
0.69
3.84
4.41
(0.13)
0.44
0.17
0.74
Algiers
0.87
0.01
0.01
1.83
2.11
0.95
1.23
0.95
1.23
SLFPA West
Total
3.85
1.00
0.70
5.67
6.51
0.82
1.66
1.12
1.96
SLFPA East + 29.04
West Total
6.14
4.62
45.27
52.00
10.09
16.82
11.61
18.34
Pontchartrain
3.16
0.59
0.45
7.15
8.21
3.40
4.46
3.54
4.60
South
Lafourche
0.90
0.07
0.07
2.92
3.36
1.95
2.39
1.95
2.39
Terrebonne
1.65
1.66
1.66
3.15
3.62
(0.16)
0.31
(0.16)
0.31
Total
34.75
8.46
6.80
58.49
67.19
15.28
23.98
16.94
25.64
SOURCES: USACE cost estimate for the HSDRRS (USACE methodology described in Section 2; author’s calculations.
37
References
Bowker, J. Michael, H. Ken Cordell, and Cassandra Y. Johnson, “User Fees for Recreation
Services on Public Lands: A National Assessment,” Journal of Park and Recreation
Administration, Vol. 17, No. 3, 1999, pp. 1–14. As of November 26, 2012:
http://www.srs.fs.usda.gov/pubs/1372
Louisiana Legislative Auditor, Louisiana levee district audited financial statements, various
dates. As of November 26, 2012:
http://app1.lla.state.la.us/PublicReports.nsf/vwPRByServiceFinancial
Oates, Wallace E., Fiscal Federalism, New York: Harcourt Brace Jovanovich, 1973.
39